As parties pursue restructuring of Venezuelan sovereign debt, they should be sensitive to U.S. economic sanctions prohibitions. The sanctions prohibitions broadly apply to "U.S. persons" – U.S. citizens and permanent residents, legal entities that are organized under U.S. law, and any person in the United States or acting through a person, such as a bank, in the United States. United States authorities sometimes license otherwise forbidden activity if they find that planned activity would comport with U.S. foreign policy. 

Blocking Prohibitions

Sanctions generally forbid U.S. persons from engaging, directly or indirectly, in transactions which involve the interest(s) of a "blocked" person. Blocked persons include anyone on the U.S. Treasury Department’s Office of Foreign Assets Control ("OFAC") List of Specially Designated Nationals and Blocked Persons, https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx.

Attachment 1 lists Venezuelan persons whom OFAC has designated as being blocked. The list includes many Venezuelan government officials, including Venezuela’s President and Vice President (the latter of whom is reportedly leading restructuring negotiations). OFAC treats a legal entity as being blocked if one or more blocked persons own 50% or more of the legal entity.

On the one hand, blocking prohibitions do not forbid all dealings with the Venezuelan government. On the other hand, OFAC has warned that U.S. persons should not, without a license from OFAC, engage in debt restructuring discussions that involve participation by a blocked person.​​

Finance-Related Prohibitions

Sanctions generally forbid U.S. persons from participating in transactions relating to certain types of Venezuelan government debt and equity. Subject to exceptions, these prohibitions cover dealings involving:

1. debt issued by Petroleos de Venezuela, S.A. ("PdVSA") on or after August 25, 2017 (if the debt has a maturity of more than 90 days);

2. (a) debt issued by the Venezuelan government or a government-controlled entity (other than PdVSA) on or after August 25, 2017 (if the debt has a maturity of more than 30 days) or (b) equity issued by a Venezuelan government-controlled entity on or after August 25, 2017;

3. bonds issued by the Venezuelan government or a government-controlled entity before August 25, 2017;

4. profit distributions by Venezuelan government-controlled entities to the Venezuelan government or a government-controlled entity; and

5. the purchase of securities from the Venezuelan government or a government-controlled entity other than: (a) debt securities issued by PdVSA on or after August 25, 2017 (if the debt has a maturity of less than or equal to 90 days): and (b) debt securities issued by the Venezuelan government or a government-controlled entity (other than PdVSA) on or after August 25, 2017 (if the debt has a maturity of less than or equal to 30 days).

General License Authorizations Regarding Finance-Related Prohibitions

OFAC has authorized transactions that would otherwise be prohibited by prohibitions 1, 2 or 5 above if the only Venezuelan government-controlled entities involved are CITGO or CITGO subsidiaries.

OFAC has also established that prohibition 3 – the general ban on dealings relating to Venezuelan government bonds – does not apply to dealings in certain listed bonds (Attachment 2). It is understood that the list actually covers nearly all bonds issued by the Venezuelan government before August 25, 2017.

Finally, OFAC has established that prohibition 3 does not forbid dealings in bonds that were issued before August 25, 2017 by U.S. entities that are owned or controlled by the Venezuelan government, directly or indirectly – including CITGO and its U.S. subsidiaries.

Prohibition 2 and Restructuring Transactions that Create New Debt

Crucially, the authorizations described above do not allow U.S. persons to engage in restructuring Venezuelan government bonds if the restructuring yields what OFAC considers to be new debt. OFAC has advised that any material change in a debt instrument’s terms – such as maturity extensions or interest rate reductions – yields new debt. Prohibition 2, then, generally forbids U.S. persons from participating in restructuring transactions for Venezuelan government bonds that, in OFAC’s view, create new debt having a maturity exceeding 30 days. Such participation includes supplying financial or legal services in connection with restructuring transactions.

Extraterritorial Scope of U.S. Sanctions Prohibitions

As indicated above, the Venezuela sanctions prohibitions always cover the actions of U.S. persons -- U.S. citizens and permanent residents (wherever located), legal entities that are organized under U.S. law (wherever located), and any person in the United States or acting through a person in the United States. The prohibitions generally do not cover actions of non-U.S. institutions acting outside the United States. That a non-U.S. institution owns or controls business operations in the United States does not cause the non-U.S. institution’s operations outside the United States to be within the scope of sanctions prohibitions. But those U.S. operations would always be within the sanctions’ scope.

EU Measures

On 13 November 2017, the European Union adopted Council Regulation (EU) 2017/2063, which provided for, inter alia, the freezing of funds and economic resources of certain persons, entities and bodies found to be responsible for serious human rights violations or abuses or the repression of civil society and democratic opposition in Venezuela. These measures, which also prohibited certain transactions in military equipment are less extensive than the US sanctions discussed above but nevertheless show a determination by the EU to place pressure on the Venezuela government. To date we are not aware that any individuals or entities have been named for the purpose of the freezing orders referred to above.